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When Keepin It Old School Goes Wrong: Debating Transparency in FI Markets – ViableMkts

Full Article: ViableMkts

Complaints and fears about mandated transparency are warranted, but eliminating or preventing transparency also requires examination. In theory, limited transparency should encourage robust market making activity due to the commercial opportunity available in an inefficient environment. In practice, lack of transparency is the root cause of some of the largest systemic issues in unstructured OTC markets

Comments
  • Goose
    GooseSeptember 30, 2016"But if you use any IDB information to help determine the bid/offer you show your client you are making a price based on other peoples prices. Now if you are talking about just taking a street bid and making it your own, or just pennying a street bid, I would agree that is a C player, and dangerous game. I didn't think the paper was insinuating that was the end goal. I thought it was talking about how an increase in limited transparency in the current marketplace would…"
  • Merlin
    MerlinSeptember 30, 2016"I don't think I said it is not an essential piece of one's workflow. What I said was that traders shouldn't be making prices based on others prices. Recipe for disaster in an illiquid market. Don't bid 98 3/4 on a bond you have no meaningful intelligence on just because someone else is making that bid. They have more information than you, may actually be a seller, not a buyer, may have no bid after they cover their short or fill a client order, etc... You get the pict…"
  • Goose
    GooseSeptember 30, 2016"Merlin, thoughtful commentary and am curious on your take on the IDB markets; only C players use them to price bonds and dealers are routinely giving up where markets are and trades are happening in the street so clearly not protecting price info. When a dealer gives up markets and trades happening in the street, isn’t he using that as validation for where the market is, and as support for what he is trying to get done? When a good customer came in and wanted you to c…"
  • Merlin
    MerlinSeptember 30, 2016"i forgot one thing. Dealers use the IDB madket to move/take on risk when it fits them, not to price bonds, except for the C players. It is the access to liquidity they are protecting, not pricing information. in fact, dealers are routinely giving up where markets are and trades are happening in the street so clearly not protecting price info. And regarding Virtu, did you miss the article where they said they aren't going near FI, even UST's, never mind corporates. Not…"

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10 Comments on "When Keepin It Old School Goes Wrong: Debating Transparency in FI Markets – ViableMkts"

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Wolfman
Member
I love movie quotes and kudos to Viable Markets for picking some great ones! I have a few of my own that I think can help us get to the core of what’s going on here. “One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” – William Feather “Sometimes your best investments are the ones you don’t make.” – Donald Trump “Lesson number one: Don’t underestimate the other guy’s greed.” – “Scarface” (1983) I especially like the last one… I use these because they help… Read more »
Goose
Member
I agree with the basic concepts outlined here: rapid market growth, balance sheet curtailment, has led to much more pricing ambiguity. Just look at the IDB market. The street was a main place in price discovery for dealers, now the dearth of business has hurt both parties, and has the IDB’s invading the buy side. Customers have a somewhat aggregate view of dealer markets. Dealers are struggling with an incomplete picture, trying to commit risk capital where the price for being wrong is x times higher than it was 8 years ago . You can see the effect in the… Read more »
Slider
Member
This makes a lot of sense to me. Transparency enhances price integrity. Price integrity leads to more confidence in the markets resulting in more activity. There isn’t a single market that isn’t under disruption right now starting from how we hail a taxi to how we buy food. If the fixed income markets want to see better days, participants must challenge themselves to think outside the box. Just because your grandparents saw transparency as a bad thing, you don’t have to as well. After all, your grandparents also thought cigarettes were sophisticated. And the bit about the sheer growth of… Read more »
Merlin
Member
Sorry for the tardiness in getting this comment in. I do not agree that transparency is the solution to the liquidity problem in corporate bonds for round lots nor do I believe that if a dealer knows where someone else is bidding/offering it gives them more confidence in making a price. People may have a bid on a bond for many reasons; think something is cheap, covering a short, hedging risk, have a client order/buyer. Once they get hit it doesn’t mean they will have ongoing appetite or that someone else will so why should another dealer be willing to… Read more »
Jester
Member
Thank you Merlin for providing the comedy relief this week. Your impression of an out of date, caveman trader was spot on. That was awesome and in jest right? Right? Because nobody could write something like this with a straight face: “I would argue that a trader that makes prices based off of others prices (transparency) is a pretty poor trader and in unlikely very profitable. The idea that you need to see others prices to have confidence in your price is just wrong.” Pure hilarity…….Knowing where prices are is actually the foundation to profitable trading. Don’t believe me. Ask… Read more »
Slider
Guest
Hello Jester, hope you are well. Sorry for the delay in my response; for some reason I was not notified of your diatribe. I did not say that bond traders are ‘mythical creatures that price risk blindfolded and just “feel” the market. That would be ludicrous and my argument is that traders that trade off of others prices are doing just what you are suggesting traders should not do. Instead of them going off a ‘feel’ for the market you are asking them to take others pricing as an accurate measure of where a bond should trade. Market makers make… Read more »
Merlin
Member
i forgot one thing. Dealers use the IDB madket to move/take on risk when it fits them, not to price bonds, except for the C players. It is the access to liquidity they are protecting, not pricing information. in fact, dealers are routinely giving up where markets are and trades are happening in the street so clearly not protecting price info. And regarding Virtu, did you miss the article where they said they aren’t going near FI, even UST’s, never mind corporates. Not enough data and activity to make a price. Get out of the equity/fx/futures mentality, we are talking… Read more »
Goose
Member
Merlin, thoughtful commentary and am curious on your take on the IDB markets; only C players use them to price bonds and dealers are routinely giving up where markets are and trades are happening in the street so clearly not protecting price info. When a dealer gives up markets and trades happening in the street, isn’t he using that as validation for where the market is, and as support for what he is trying to get done? When a good customer came in and wanted you to commit liquidity on the wire did you not pick up the phone/check your… Read more »
Merlin
Member
I don’t think I said it is not an essential piece of one’s workflow. What I said was that traders shouldn’t be making prices based on others prices. Recipe for disaster in an illiquid market. Don’t bid 98 3/4 on a bond you have no meaningful intelligence on just because someone else is making that bid. They have more information than you, may actually be a seller, not a buyer, may have no bid after they cover their short or fill a client order, etc… You get the picture. You pay 98 3/4 and then what?
Goose
Member
But if you use any IDB information to help determine the bid/offer you show your client you are making a price based on other peoples prices. Now if you are talking about just taking a street bid and making it your own, or just pennying a street bid, I would agree that is a C player, and dangerous game. I didn’t think the paper was insinuating that was the end goal. I thought it was talking about how an increase in limited transparency in the current marketplace would be very beneficial in informing the traders final decision on price, and… Read more »
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